Greenspan Says Globalization Driving U.S. Current Account Gap
Greenspan Says Globalization Driving U.S. Current Account Gap
Nov. 14 (Bloomberg) -- The record U.S. current account deficit coincides with a ``new phase of globalization'' marked by a declining preference for home markets among the world's investors, Federal Reserve Chairman Alan Greenspan said.
``The rise of our deficit and our ability to finance it appears to coincide with a pronounced new phase of globalization that has emerged in the past decade,'' Greenspan said in the text of a speech being delivered today via satellite to the Banco de Mexico. ``This phase is characterized by a major acceleration in U.S. productivity growth and the decline in what economists call home bias, the parochial tendency to invest domestic savings in one's home country.''
The Fed chairman said neither interest rate increases, exchange rate adjustments nor cuts in the U.S. fiscal deficit would likely result in large reductions in the current account, the widest measure of trade. The deficit last year widened to $665.9 billion from $530.7 billion. It totaled $195.7 billion in the second quarter, or 6.3 percent of gross domestic product.
``A nation's current account balance thus is essentially a market phenomenon that is not readily subject to rebalance by targeting one or more policy variables such as the exchange rate,'' Greenspan said. Policies that would attempt to manipulate some relationship between the dollar and euro would probably not succeed, he said.
``I doubt, however, whether, given the current size of global financial markets, locking together two major currencies such as the dollar and the euro is feasible any longer,'' Greenspan said. ``Over time, the required large domestic adjustments would be quite unlikely to be accepted by the majority of residents of either the United States or those of the euro area.''
`Practical' Limit
The Fed chairman said the flow of capital across borders will pare down domestic investments to some ``practical'' limit and the funding of the current account deficit will be more difficult. Even before that point, however, constraints on the funding of the deficit are likely to come from ``foreign investors' fear of portfolio concentrations of claims on the residents and government of the United States.''
Greenspan, 79, did not speak about the near-term rate outlook or give details of his analysis of the economy in the text of his remarks.
Greenspan, with less than three months left in his 18-year tenure as U.S. central bank chief, is giving his final round of speeches as a policy maker before Ben Bernanke takes over in February. The current account deficit, the widest measure of trade in goods, services and financial transfers, widened to $394.3 billion in the first half of the year.
A Puzzle
Greenspan told Congress earlier this month that the mere fact that the deficit represents more than 6 percent of GDP is ``one of the major puzzles.''
``The reason why I believe it exists is that it's a market phenomenon which is reflecting globalization,'' Greenspan said Nov. 3 before the Joint Economic Committee. ``It can't go on indefinitely, as I've indicated previously.''
Bernanke may continue Greenspan's tradition of discussing issues outside of monetary policy. While Bernanke doesn't plan to discuss specific legislation, he understood that the role of the Fed chairman was to talk about the other side of the economic ledger -- fiscal policy and other economic issues,'' New York Senator Charles Schumer said Nov. 10 after meeting with Bernanke.
Greenspan's non-renewable term on the Fed's Board of Governors ends Jan. 31. Bernanke, 51, chairman of the Council of Economic Advisers, was nominated Oct. 24 by the White House to succeed Greenspan and will have a confirmation hearing before the Senate Banking Committee tomorrow.
Another Fed policy maker, St. Louis Fed President William Poole, said in a Nov. 9 speech that any narrowing of the current-account deficit is unlikely to disrupt the economy or be accompanied by a rapid decline in the dollar.
``A hard landing is very unlikely provided that U.S. monetary and fiscal authorities maintain sound policies,'' said Poole, who is not a voting member on the Fed's policy-making Open Market Committee this year. ``I believe the current account adjustment will be fairly slow and orderly, and that it may not begin for quite some time.''
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net
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